Contributions are made at a company’s discretion each year regardless of whether the company makes a profit. If you plan on making a profit sharing contribution, check that your plan document includes provisions for the type of profit sharing allocation formula you choose (comp-to-comp vs. flat dollar).
1. Flexibility and Decision-making:
- Contributions are made at the company's discretion each year, regardless of whether the company makes a profit.
- You have the freedom to choose the type of profit sharing allocation formula (comp-to-comp or flat dollar) in your plan document.
2. Benefits for Employees:
- Profit sharing contributions may supplement employees' own savings, helping them build a stronger retirement nest egg.
- These contributions provide tax advantages, allowing employees to save on taxes while growing their retirement funds. Some examples are the exemption from the annual deferral limit and the fact that contributions are made on a pre-tax basis.
3. Clear Limits:
- There is no minimum amount required for profit sharing contributions, giving you the flexibility to contribute according to your company's capabilities.
- The total profit sharing contribution is limited to 25% of eligible compensation, ensuring a fair allocation.
Contributions per participant cannot exceed $58,000 ($64,500 including catch-up contributions) for 2021, providing clarity on the maximum contribution amount.